Drudge Retort: Red Meat for Yellow Dogs
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The Federal Reserve is invoking Depression-era power to buy massive amounts of short-term debts in a dramatic effort to break through the credit clog. The Fed will buy "commercial paper," a short-term financing mechanism that many companies rely on to finance their day-to-day operations.

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Who needs comedy writers when you've got Congress?

The bailout bill the Senate is schedule to vote on tomorrow addresses NONE of the failings of the bill the house voted down yesterday -- no regulatory reform, inadequate oversight, and no guarantee the taxpayers will be repaid.

It does, however, require health insurance companies to cover mental illness at parity with physical illness.

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The crisis on Wall Street is shrinking net worths and erasing nest eggs. Next on the block: multimillion-dollar homes...

"...Not only are average Americans defaulting on subprime loans, wealthier individuals who were relying on bonuses that never came through or who took out option adjustable-rate mortgages and must now face the skyrocketing monthly rates have also had to flee.


The furor intensified Friday over Washington's decision to pursue Islamic militant targets inside Pakistan, with opposition lawmakers threatening the country could pull out of the war on terror if the U.S. refuses to respect its borders. "America is daily deepening the well of resentment against itself that no amount of aid or pious diplomatic platitudes will ever fill," The News daily said in an editorial Friday.


A New Mexico man with four previous drunken driving convictions had an excuse for police after weaving in and out of traffic on Interstate 40: his passenger spilled his beer.


Comments

If that was the amount owed in 2002 by only one bank, you can probably make a safe bet now hundreds of trillions $$$$ are owed in derivatives -- not $57 trillion... We are in serious trouble. --CalifChris

"amount owed" isn't really the right term. Suppose they're all mortgage-related derivatives, for example. If the mortgage-holders don't default, these hundreds of trillions $$$ derivatives will probably make money for the companies/banks that hold them. (Unless these guys were REALLY stupid, in fact, they should make a lot of money if there are no defaults.)

The problem is that they lose money on their derivatives if a certain fraction of their mortgage-holders defaults, and the derivatives are so complicated that no one knows exactly what that fraction is. That's making both potential investors (stock purchasers) and potential lenders wary of dealing with companies holding lots of derivatives, and the concern is that the companies may go bankrupt before the returns from their derivatives come in. That's what happened to LTCM --

In the end, the idea of LTCM's directional bets was correct, in that the values of government bonds did eventually converge. Due to the high leverage, however, this only happened after the firm's capital was wiped out. Thus, the incident confirms an insight often (though perhaps apocryphally) attributed to the economist John Maynard Keynes, who is said to have warned investors that although markets do tend toward rational positions in the long run, "the market can stay irrational longer than you can stay solvent." en.wikipedia.org

They're betting on the future price of something.

Like what? Stocks? mortgage values? or just anything?

#13 | Posted by CalifChris

Yes -- just anything. A lot of the early derivatives, for example, were bets on stock market indices. You didn't actually BUY the stocks, mind you -- you purchased a security whose value was defined in terms of the Dow, or S&P 500, or whatever.

They brought down Long-Term Capital Management in the late 1990's, Warren Buffett was sounding alarms in 2002, and our fearless leaders did NOTHING to regulate them.

The current crisis erupted because when the gov't did nothing, the mortgage industry figured out they could use this strategy to pass along risk by bundling mortgages into mortgage-backed securities and selling insurance that wasn't backed by anything.

When I was taking B-school finance classes many moons ago, the text we used had a publication date about 2 years LATER than the year we were using it -- it's understood that finance wiz's, like tax accountants, spend a lot of time trying to figure out how to exploit loopholes in existing regulations, and so by the time a finance text goes to print, all sorts of new financial instruments will have been invented. (How they were allowed to print a fraudulent publication date to fool people into thinking the text was more current than it was is beyond me.)

For the government, regulating the finance industry is like trying to keep up with computer hackers -- Microsoft keeps sending out updates to thwart the latest strategies for hacking into Windows. Unfortunately, our government doesn't seem to put much effort into keeping up with the finance guys. It was obvious after LTCM's demise in the late 1990's that derivatives needed to be regulated, and to this day, they've done NOTHING. Nada.

Probably they don't want to enact anything that requires full disclosure overnight, because everyone would pull all their money out of whichever of the big banks is/are holding so much of their assets in derivatives and that would topple the house of cards. But it would be nice to hear that there is some regulatory reform in the works. Even a commitment to require full disclosure and capital adequacy by a certain date would provide some reassurance that the gov't truly believes the problem can be brought under control.

On the bright side, the problem isn't that derivatives are worth nothing. It's that no one is sure how much they're worth, right now too many people are unwilling to take a chance on them, and so probably a lot of these assets are undervalued.

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